The High Court has held that a purchaser was entitled to recover the entirety of the purchase price and retain the purchased shares for a breach of warranty relating to the accuracy of the target company’s accounts, which rendered the target worthless at the time of purchase.
In 116 Cardamon Limited -v- MacAlister & Anr the Defendants owned Motorplus Limited (Motorplus), an insurance and claims handling business. They agreed with the Claimant a significant discount to the sale price (being some £2.4m against an initial valuation of £5m), on the basis that the sale was to be concluded within two weeks and conducted without any due diligence being performed. The share purchase agreement contained various warranties by the Defendants, including a warranty as to the ‘truth, fairness, accuracy and proper preparation’ of Motorplus’ accounts.
Shortly after completion Motorplus faced cash flow problems and an audit revealed that the accounts upon which Motorplus was purchased were inaccurate and needed to be re-stated.
The Claimant brought proceedings alleging that:
The Court considered that all of these matters amounted to a breach of warranty. However, it fell to be determined whether disclosure of these matters was given. The Court’s determination on the final two issues is particularly interesting:
The Boomerang-Tag Claim
It was agreed between experts that the debt owed by Boomerang-Tag should have been written-off in full. It was, however, held that the true position had been ‘fairly disclosed’ to the Claimant; the Defendants had included a specific disclosure stating that while only half the debt had been provided for in the accounts, that did not mean that the other half was recoverable. Moreover, unusually the disclosure letter stated that all communications between the parties and their advisers were to be treated as disclosed, which included an email from the Claimant to the Defendants acknowledging that the debt was likely irrecoverable.
The Broker Claim
Motorplus had changed the method by which it paid insurance brokers, a consequence of which the company’s accounts were misleadingly uplifted. The Defendants’ experts sought to argue that the change in method was disclosed because that change was readily apparent from Motorplus’ accounts and a “reasonable valuer” would have been “on notice” as a result. The Court did not agree, finding that there was no specific disclosure of the matter and that the Defendants’ expert was wrongly evaluating what a “reasonable valuer” should have known with the benefit of the expert’s own present knowledge.
The normal approach for damages for breach of warranty is for the buyer to be put into the position in which it would have been had the information warranted been true (i.e. the difference between the value of the shares as warranted and the true value).
Unusually, the Court held that the ‘as warranted’ value was, in this case, not the purchase price agreed under the SPA, but was in fact a higher amount: the judge reasoned that the parties had deliberately agreed a discount to the purchase price in return for a swift completion without the usual due diligence.
Most notably, this decision highlights the possibility that the value of a company’s shares ‘as warranted’ could in fact be worth significantly more than the purchase price, especially in cases where the company has been purchased for a ‘good bargain’.
The judgment also highlights that it is of paramount importance that a seller gives proper, fair and, fundamentally, detailed disclosure– in short, the disclosure must enable the buyer to understand the matter in question and thus the true condition of the business.
  EWHC 1200 (Comm)